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January 15, 2009

When will the recession end? Part 7 False signals of recovery

Many hopeful economists and political analysts are desperate to find any source of good news signaling that we may be at the bottom of the recession / depression or starting to rebound to coincide with the Barack Obama inauguration. Many will point to the 300 basis point jump in the Baltic Dry Index-the obscure London based indicator that tracks the health of global maritime trade. The index, measures the costs for shipping dry bulk commodities such as iron ore, coal, coke, steel and grains, It topped out at over 13,000 basis points last May and by December nose-dived 96% back down to earth to 663 b.p.as global trade virtually collapsed, pushed down by a credit squeeze and sliding demand for global trade. Now it's started to rebound off its lows, inch up ever so slightly. Yesterday, the index climbed 9 b.p. to 920 points from 911 points on Tuesday.

Some analysts will jump for joy pointing at these Baltic Dry Index rebounds but ship-owners are apparently not as enthused.

This shows the danger of just tracking naked numbers, without digging deeper and exploring the reasons behind these moves. In the stock market they call it a dead cat bounce.

According to my sources, some oil companies are starting to use layed up dry bulk ships as storage vessels for oil. With no where to store & ship oil as it flows out of pipelines, these ships are tied up in dock. Oil companies are waiting it out until oil prices rebound to sell their commodities to overseas buyers-not an encouraging sign. So yes, these ships are consigned, but not actually traveling anywhere yet-so that's why the BDI has inched upward, giving you a false positive signal.

UPDATE- "Bloomberg is quoting Frontline Ltd, the world’s biggest owner of supertankers, as saying that about 80 million barrels of crude oil are being stored in tankers, the most in 20 years, as traders seek to take advantage of higher prices later in the year."

The financials around global maritime trade have not improved either, in fact in some cases have gotten worse.

-Shipping firms are increasingly canceling orders for new dry bulk carriers due to the uncertain business environment.

-Excess capacity in the business is a major problem says Purchasing.com...."even if demand comes back in 2009, there is still a strong chance of overcapacity due to the shipbuilding order boom that took place when rates were at their peak. According to the Wall Street Journal, in the last two years 50 million tons of capacity have been added to the global fleet of 420 million tons. "But in 2009 and 2010, over 175 million tons is due to come into service."

-Frozen credit lines have paralyzed the shipping trade since mid-September, drastically reducing shipments and, in turn, the use of dry bulk carriers.

-Also a lack of access to letters of credit, in which banks guarantee payment for merchandise, is another major barrier to the resumption of global trade.

“It is not a sustained rally as of now,” said India’s biggest ship-broking firm, Mumbai-based Trans Ocean Agency Pvt. Ltd. “It is momentary. The problems with letters of credit persist.”

Adding...."that given the extent of the fall over the past few months, a minor improvement of even 5% or 10% will not make a difference. ... “It could be a technical bounce-back.” say news reports.

"Conditions should become clearer when China, the world’s biggest importer of iron ore, completes price negotiations with suppliers for its new annual contract beginning February." say shipping experts. Everybody will be waiting with anticipation.

Excess capacity is a problem in many industries including housing and the autosector, and we won't be heading out of the recession / depression until the supply/demand ratio evens out--that's basic economics 101,that all the optimist economists ignore and don't tell us.

Downstream Container traffic is no less robust

"Lloyd's List quotes the Drewry Container Forecaster, who now estimates that global container traffic totalled 153m teu last year, representing growth of 7.2% from 2007. A few months earlier, Drewry had been forecasting trade expansion of 8.6% for 2008.This year, growth is expected to slow to just 2.8%, with a few isolated trades such as the Asia-Middle East and Asia-Africa corridors likely to post some positive figures. The big east-west routes are in terrible shape, with Drewry forecasting that the Asia-Europe trade will shrink by 4.1% in 2009, following growth of just 1.9% in 2008. Pacific traffic is also very weak , with Drewry calculating that eastbound volumes from Asia to

North Americadropped 5.7% last year, with a further contraction of 3.2% forecast for 2009.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets. South Korea's exports fell 30% in January compared to a year earlier. Exports have slumped 42% in Taiwan and 27% in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.A report ING yesterday said shipping activity at US ports has suddenly plunged. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18% year-on-year, a far more serious decline than anything seen in recent recessions. Source- Denmark's A.P."

Expert, Consultant and Keynote Speaker on Emerging Smart Technologies, Innovation, Strategic Foresight, Business Development, Lateral Creative Thinking and author of an upcoming book on the Smart Economy "